Creditors begin sparring over when Tribune became insolvent

Lawyers and expert witnesses at the confirmation hearings in Tribune Co.'s bankruptcy case began this week to address the complex question of when the Chicago-based media company became insolvent and who should have known about it. But amid often-numbing testimony about discount rates and cash-flow tax values, strategies among the two groups of warring creditors in the case are becoming clearer as they each try to persuade U.S. Bankruptcy Judge Kevin J. Carey to accept their plan for restructuring the company.

The company and lenders that financed its ill-fated 2007 leveraged buyout maintain that the intricate, two-step deal did not itself bankrupt Tribune — a charge being pressed by junior creditors led by hedge fund Aurelius Capital Management. Former University of Chicago law scholar Daniel Fischel testified as an expert witness that it was reasonable for the lenders to assume the company was solvent at the time that each of the two steps of the deal closed in 2007.

But faced with ample evidence from other quarters, including the report of a court-appointed examiner, that the second step of the deal may have rendered the company insolvent, the senior group has also adopted another tactic. They produced Bernard Black, a finance and law expert from Northwestern University, who has spent the last year, for a $500,000 fee, calculating probabilities for various potential legal conclusions in the case. He testified that even if the buyout were a form of fraudulent conveyance, potential recoveries for the junior creditors pressing the claims would most likely not be higher than the 34 cents on the dollar they've been offered by senior creditors to settle. Black argued that the only way the junior creditors could do better is if they could prove that both Step 1 and Step 2 of the 2007 buyout were fraudulent conveyances. That would "avoid," or invalidate, the more than $8 billion in senior lender claims and give the junior creditors full recovery on the more than $2 billion they are owed. Given the legal hurdles, Black concluded, there was only a small chance of that outcome. Aurelius, however, is betting that it can convince the judge that there is ample value in its legal claims. While it will have to wait until next week to put on its case, David Zensky, a lawyer for the junior creditors, said in his opening statement that "there are several routes that would provide recovery to the [junior creditors] far in excess of the proposed settlement."